Benefit Strategies
Qualified Default Investment Alternatives
Overview
The Pension Protection Act of 2006 (PPA) created the concept of a Qualified Default Investment Alternative (QDIA) to meet the needs of workers who fail to elect investment options for contributions into defined contribution retirement plans that allow participant investment direction. On Oct. 24, 2007, the U.S. Department of Labor issued final regulations regarding QDIAs.
If certain conditions are satisfied, the final regulations provide employers safe harbor relief from fiduciary liability for investment outcomes experienced by participants whose contributions are invested in a QDIA due to their failure to elect their own investments. The relief is the same as that provided to plan fiduciaries under ERISA section 404(c) with respect to participant-directed investments. The final regulations, however, do not relieve fiduciaries of their obligation to prudently select and monitor QDIAs, or from any liability that results from failure to do so.
Requirements:
Under the new regulations, four types of QDIAs are considered appropriate for participants and beneficiaries who fail to direct the investment of their contributions:
1. A product with a mix of investments that takes into account the individual’s age, retirement date, or life expectancy (i.e., a life-cycle or targeted-retirement-date fund).
2. An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (i.e., a professionally-managed account).
3. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (i.e. a balanced fund).
4. A capital preservation product for only the first 120 days of participation. If a participant fails to provide an investment direction by the end of the 120-day period, amounts must be transferred to another QDIA that has been selected by the plan fiduciaries as the long-term default investment.
Participants and beneficiaries must be given a meaningful opportunity to choose investments for their contributions prior to investment in the QDIA. The notice requirements are fairly straight-forward, but are also very specific. This is not an area that you would want to delve into without qualified guidance.
For more information regarding qualified default investment alternatives, contact Donald Potter or your plan administrator.